When to Initiate a Capital Raising Process?
A capital raising process can be initiated for various reasons. The key is to identify the timing and reason that are most appropriate for the company’s situation.
Capital raising is needed for example:
- For growth investments: As the company experiences significant growth, additional capital may be necessary to conquer new markets, expand the product portfolio, or scale the business.
- For engaging a strategic partner: The goal may be to find a partner who can add value to the company, such as through technology, expertise, or new market channels.
- During an ownership transition: When an ownership transition becomes relevant, whether through a generational change or the sale of shares, the capital raising process may be necessary.
Timeline
Capital raising is a relatively long process that requires careful planning and preparation.
- The importance of timing: It is crucial to allocate enough time and resources for each phase of the process. Based on experience, the entire process can take 6-12 months from preparation to signing.
- Optimal timing in the market: The best times for capital raising are often early spring or early autumn, when market activity is at its peak, and potential investors' interest is highest, and their schedules are not yet filled with other projects.
Capital Raising Process
Fundraising process can be divided into several phases, each critical to success.
1. Preparation:
-
- Essential materials, such as the company's presentation and financial forecasts, must be carefully prepared. These materials are key tools for information exchange, making their successful preparation crucial.
- Potential capital sources should be comprehensively identified, and the project should be structured accordingly.
- The project’s structure and timeline must be meticulously planned. The project should be outlined as clearly and simply as possible, and the impact of changing elements should be minimized where feasible.
- The essential and most important selling points of the project must be identified and clearly documented.
- Depending on the project, a company valuation may be necessary.
2. Contacting and Communication:
-
- Contact lists are drawn up, and contacting is initiated in a planned manner.
- Presentations and management meetings are arranged with capital providers, with thorough preparation.
- The process and communication with contacts are managed efficiently and systematically to ensure all parties remain engaged in the process for the best outcome.
3. Indicative Offer:
-
- The indicative offer or proposal is a critical milestone where the capital provider formally expresses interest in financing the project and lists the key terms related to the transaction.
- Creating a competitive environment is essential to secure the best terms for the project at this stage. The more interest generated, the better the likely outcome.
- The clearer the indicative offer and the term sheet derived from it, the more likely it is to avoid surprises and misunderstandings during the due diligence phase.
4. Due Diligence:
-
- The capital provider conducts a more detailed review of the company’s condition, often utilizing external advisors.
- This review may include in-depth analysis of the business, contracts, taxation, or technology.
5. Agreements:
-
- The details of the agreements relative to the term sheet are carefully negotiated.
- Agreements to be prepared may include, for example, an investment/financing agreement or purchase agreement, as well as a shareholders' agreement.
6. Signing:
- A successful process culminates in the signing of the agreements, marking the beginning of a new chapter in the company’s growth story.
Advisory Fees
Capital raising process typically involves fees, which are often divided into a retainer or monthly fee and a success fee with the financial advisor. The size of the fees depends on the workload of the process and the size of the capital round.
Summary
Capital raising process is complex and demanding, but with careful planning and the right partners, it can be the key to a company's success. By following this blog, you can gain more information and tips on how to prepare for and execute fundraising more successfully. In future blog posts, we will delve deeper into the different phases of the capital raising process.
Blog author:
Miikka Lievonen
Director, Grannenfelt Finance
miikka.lievonen@grannenfeltfinance.fi
+358 50 554 5844
LinkedIn profile
The writer has 10 years of experience working in corporate finance and capital raising related projects. He has advised multiple growth companies in fundraising including Vastuu Group, Beely, P2X Solutions, and Varjo.
